There are five reasons why we believe Apple will be the top-performing FANNG stock in 2020. When compared to other tech and services companies, we consider the fair value for AAPL to be $350-$400. For example, applying FB’s current year multiple to shares of AAPL suggests a $395 share price. We believe the base case of $350 (21% upside) is achievable in 2020 and $400 (38% upside) is achievable sometime in 2021 (38% upside).
5 Reasons Why:
- Easy iPhone Comps. Apple is likely to meet or exceeded analyst expectations in 3 of the 4 quarters in 2020 based on easy iPhone comps. iPhone will account for about 52% of revenue in 2020 with favorable year-over-year comparables: -15% in Dec-19, -17% in Mar-20, -12% in Jun-20, and-9% in Sep-20.
- Continued Growth in Apple Watch. Wearables growth should continue to benefit from widespread consumer adoption, along with a new version of AirPods (better battery), Apple Watch, and the release of Apple Tags (like Tile) late in the year. Next year, wearables will be bigger than Mac, accounting for 11% of revenue, up from 8% in CY19. We believe AirPods will account for 5.8% of Apple’s overall revenue, Apple Watch 5.5%, and Beats at 0.3%. Our model suggests despite larger numbers, wearables growth will remain impressive at 45% next year, compared to 58% in CY19 and 44% in CY18. As mentioned, Apple Tags will likely be new to the category in 2020, contributing fractional revenue in 2020. Apple Tags will attach to keys, wallets, and other belongings to keep track of their location. Beyond 2020, Apple Watch has significant room to grow, given that global Apple Watch adoption remains nascent. We expect 20-30% Apple Watch unit growth for the next five years. We estimate that about 9% of iPhone owners use an Apple Watch today, based on a 3-year expected life. Long-term, we believe the attach rate could reach 40%, which implies about 125m units a year compared to our 36.8m estimate for Cy20. This implies that about 12% of Apple’s overall revenue will be from the Apple Watch in 2025 ($48B in Apple Watch revenue out of $385B in overall revenue in 2025).
- Five New iPhone Models in 2020. Revenue growth will be driven by the release of up to five new iPhone models compared to 3 new phones in the each of the past two years. Most notably, we expect a new version of the iPhone SE in the first half of the year and two iPhone models with 5G announced in September.
- Investor Anticipation of 5G. 5G will be the biggest iPhone upgrade cycle since CY15, which benefited from the first full year of the larger screen iPhone 6. Beginning in 2020, investors will begin to anticipate the upcoming cycle. Long-term, we believe the 5G cycle can deliver two years of 10% iPhone revenue growth, compared to our expectation of iPhone revenue essentially flat in CY20. That said, the iPhone 5G cycle will hit full stride in CY22 and CY23. We expect the product’s first full year (CY21) to disappoint investors due to lack of 5G coverage from wireless carriers, which will act as a governor on iPhone 5G adoption.
- AAPL Will Be Rewarded With a Proper Tech Multiple. We expect AAPL’s earnings multiple to increase in 2020. Investors will begin to recognize Apple’s combination of hardware and services as a high-visibility and sticky business. The prevailing investor view is that shares of AAPL should be undervalued relative to peers based on a belief that the company’s risk profile is relatively higher, because 75% of its revenue comes from hardware. Over the past decade, Apple’s results have shown that the combination of hardware, software, and services can deliver earnings, the most important measure of financial strength, that exceed other tech companies with higher multiples. Over the next year, we believe investors will gain confidence in applying a more services-like multiple to AAPL given the hardware business (iPhone and wearables) will deliver revenue visibility similar to traditional services businesses.